Weatherford International plc – “Something Doesn’t Seem Right Here,” Equityholders Request Appointment of Equity Committee, Take Aim at Management, Noteholders and RSA

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July 22, 2019 – An ad hoc committee of the Debtors' equityholders asked the Court for an order appointing a statutory committee of equity security holders (an “Equity Committee”) that they insist is needed to conduct an investigation regarding (i) the events leading to the Debtors' May 10, 2019, Restructuring Support Agreement (the “RSA”) with holders of approximately 62% in aggregate principal amount of the Debtors’ outstanding unsecured notes (ii) and the treatment of those noteholders (including in respect of releases) under the Plan [Docket No. 193]. The Equity Committee is clearly also unhappy that the management of a company, that has whipsawed between a planned reverse stock split…and bankruptcy, "will get 400% more recovery than the current Shareholders will receive" as well as benefit from continued employment (and an equity position); all the while cloaked in the protective armor of broad releases in respect of pre-bankruptcy conduct. Nothing like taking direct aim at management to get some attention.

The motion states, “Something doesn’t seem right here. On April 30, 2019, just 60 days before the Petition Date, Weatherford Parent’s Board of Directors (the ‘Board’) solicited votes from the Shareholders for a reverse stock split (the ‘Reverse Stock Split’) to keep Weatherford Parent’s common stock trading on the New York Stock Exchange (NYSE) and make existing equity more attractive to investors. Ten days later, that decision was abruptly reversed. On May 10, 2019, the Company announced it had entered into the RSA…with its Noteholders. Trading in the Company’s shares was suspended by the NYSE, and the next day, the stock was delisted. At first, the Company was championing its stock, then hundreds of millions of dollars in market capitalization were erased overnight.

The RSA (and the chapter 11 Plan that followed) generally provides for approximately (i) 94% of the New Common Stock (defined below) to be distributed to the Noteholders, (ii) 5% of the New Common Stock to be set aside as part of a management incentive plan (the ‘MIP’) as a reward for executives, and (iii) 1% of the New Common Stock to be distributed to existing Shareholders. The Noteholders will also receive Plan consideration comprised of $1.25 billion of Tranche B Exit Notes. Under the Plan, the Board gets comprehensive releases from the Debtors and the Noteholders. The CEO keeps his job (including his position on the Board), and the remaining members of the Board can (potentially) interview to keep their Board seats. After confirmation of the Plan, the Company’s management will stand to own up to 5% of the fully deleveraged Company. In other words, management will get 400% more recovery than the current Shareholders will receive. This is in addition to the payments under various bonus and retention programs made by non-Debtor affiliates on the eve of bankruptcy, in April and May of 2019.

In addition, the Company’s financial projections seem to have varied to fit whatever narrative the Company was trying to support at any given point in time: How could the projections of a sophisticated company have been so unreliable? In February 2019, just a few months before the RSA, the Company stated on an earnings call that its goal was to put the Company on track to achieve a ‘$1 billion incremental EBITDA run rate by the end of 2019’ and the Company’s CEO emphasized ‘we continue to believe that we can deliver on our $1 billion commitment by the end of 2019.’ In May, at the time of the press release announcing the RSA, 2019 EBITDA was projected to be approximately $750 million. By June, the Debtors projected 2019 EBITDA to be $640 million.

The five-month continuous decline in projected 2019 EBITDA begs the obvious question: is there a correlation between the 2019 underperformance and the Company’s decision to focus on ‘in-court’ options instead of their out-of-court ‘Transformation Plan’ which, according to the Company’s CEO in February of this year, was on track to succeed? Shareholders deserve a satisfactory answer given the precipitous destruction of equity value. This is especially true where, as here, the Noteholders and management stand to receive 99% of a significantly delivered company and the current equity is getting only 1%. The reason this is so hard to swallow is that this is a company that everyone was led to believe (and still believes) has a bright, prosperous future ahead. Its future may be even brighter after the restructuring – in which case the Noteholders may receive a healthy windfall. That windfall should not come at the expense of the Shareholders.

Again, it doesn’t add up. A statutory Equity Committee is needed to conduct an investigation regarding the events leading to the RSA and the treatment under the Plan, including the broad releases contemplated by the RSA and included in the Plan. In addition, beyond an investigation, the Shareholders need advocacy. A statutory equity committee will provide an appropriate means to address these concerns, and others, as they arise, and provide equal footing for Shareholders.

These Chapter 11 Cases are undeniably large and complex. The Debtors have approximately $8.35 billion of funded debt, more than 1 billion shares of common equity that is widely held, and operations in over 80 countries worldwide. In the absence of an Equity Committee, it is unlikely any properly-incentivized party in interest will be reviewing the Plan, the Disclosure Statement, and other filings in the foreign and domestic restructuring cases with the exactitude necessary to ensure the rights of all Shareholders are adequately represented.”

Background

The Plan in a Nutshell

The Debtors are exchanging $7.4bn of prepetition senior notes for 99% of the emerged Debtors' new common stock and $1.25bn in newly issued "Tranche B" notes. Existing equity holders are to get the remaining 1% of the new common stock and holders of the Debtors' senior prepetition bank debt (ie $305.0mn credit facility, $297.5mn term loan and $316.8mn revolver) are to be repaid fully in cash. General unsecured claims will be treated in the ordinary course of business upon the Debtors' emergence from bankruptcy which is expected by mid-September.

Restructuring Support Agreement

On May 10, 2019, the Debtors and the Consenting Noteholders entered into the Restructuring Support Agreement whereby the Consenting Noteholders have committed to support the Plan and to provide debtor-in-possession ("DIP") and exit financing. The Restructuring Support Agreement contemplates a comprehensive deleveraging of the Company’s balance sheet and an approximately $5.85bn reduction of its prepetition funded debt (all of that coming from the extinguishment of the senior notes).  The key provisions of the Restructuring Support Agreement are as follows:

  • The Debtors Prepetition Notes will be cancelled and exchanged for (a) 99% of the New Common Stock, subject to dilution on account of equity issued pursuant to the New Management Incentive Plan, the Tranche B Equity Conversion, and the New Common Stock issuable pursuant to the New Warrants, and (b) an aggregate amount of up to $1.25 billion of New Tranche B Senior Unsecured Notes to be issued by Weatherford Delaware and Weatherford Bermuda, as applicable;
  • Holders of the Prepetition Notes will have the option to convert up to $500 million of the New Tranche B Unsecured Notes to New Common Stock at the mid-point of plan equity value;
  • Holders of Prepetition Notes also will receive subscription rights in a Rights Offering (as defined below) for the New Tranche A Senior Unsecured Notes to be issued by Weatherford Delaware and Weatherford Bermuda and backstopped by certain Prepetition Noteholders;
  • The Prepetition Revolving Credit Claims, the Prepetition A&R Claims, and the Prepetition Term Loan Claims will be repaid in full in cash;
  • All trade claims will be paid in full in the ordinary course of business;
  • The Existing Common Stock will be cancelled and exchanged for (a) 1% of the New Common Stock, and (b) three-year warrants to purchase 10% of the New Common Stock (the “New Warrants”) pursuant to the terms of the Warrant Term Sheet attached to the Disclosure Statement as Exhibit K;
  • There will be a DIP Facility which will consist of a $1.0 billion term loan facility (the “DIP Term Loan Facility”) and a $750 million revolving credit facility (the “DIP Revolving Credit Facility” and together with the DIP Term Loan Facility, the “DIP Facility”);
  • The DIP Facility will be repaid or refinanced in full upon the Effective Date of the Plan through the Company’s (a) Exit Facility and (b) issuance of up to $1.25 billion of New Tranche A Senior Unsecured Notes, which notes issuance will be fully backstopped by the Consenting Noteholders.
  • The Restructuring Support Agreement includes certain milestones for the progress of the Chapter 11 Cases, which include the dates by which the Debtors are required to, among other things, obtain certain court orders and complete the Restructuring:
    • Commencement of Chapter 11 Cases: No later than July 15, 2019
    • Commencement of Bermuda Proceedings: One calendar day after the Petition Date
    • Filing of Chapter 11 Plan, Disclosure Statement, and Solicitation Procedures Motion: One calendar day after the Petition Date
    • Entry of interim order approving DIP Motion (as defined below): No later than July 18, 2019
    • Entry of final order approving DIP Motion: Within 30 days after entry of Interim DIP Order
    • Commencement of Irish Examinership Proceeding: October 1, 2019
    • Entry of order confirming the Chapter 11 Plan: No later than September 15, 2019

Debtors' Prepetition and Re-organized Capital Structure

Pre-Petition Capital Structure

Reorganized Capital Structure

Prepetition Amended & Restated Credit Facility ("A&R")

$305,000,000

Exit Facility (undrawn on Effective Date

Up to $1,000,000,000

Prepetition Term Loan

$297,500,000

New Tranche A Senior Unsecured Notes

Up to $1,250,000,000

Prepetition Revolver

$316,742,581

New Tranche B Senior Unsecured Notes

Up to $1,250,000,000

Prepetition Notes

$7,427,067,000

N/A

N/A

Total Funded Debt

$8,346,309,581

Total Funded Debt

 Up to $2,500,000,000

Events Leading to the Chapter 11 Filings

The Debtors' Disclosure Statement for the most part provides what is a now familiar and unremarkable tale of woe for those service businesses whose health is dependent on that of the oil and gas sector generally; and the Debtors spend some time looking for cover in a crowded field of failure: "Oil and natural gas prices are dependent on factors beyond the Company’s control…dozens of oilfield services companies, whose business is dependent on spending by oil and gas companies, have filed for bankruptcy in the last several years…,"etc, etc. If the causes may be unremarkable at this point, the end result is most certainly not; with the scale of the Debtors' shortcomings really insisting upon being noticed: $5.85bn in debt to be extinguished by a company that had more than $900.0mn in negative cash flow over the last three fiscal years. 

The Disclosure Statement provides provides the following summary: "The sustained drop in oil and gas prices has impacted companies throughout the oil and gas industry including Weatherford and the majority of its customers.  As spending on exploration, development, and production of oil and natural gas has decreased so has demand for Weatherford’s services and products. The decline in spending by oil and gas companies has had a significant effect on the Debtors’ financial health. To illustrate, on a consolidated basis, the Company’s cash flows from operating activities have been negative $304 million, negative $388 million, and negative $242 million in fiscal years 2016, 2017, and 2018, respectively.

In addition to the issues facing the oil and gas industry generally, Weatherford operates in a highly competitive market. The oilfield services and equipment industry is saturated with competition from various companies that operate in the same sector and the same regions of the world as Weatherford.  The primary competitive factors include safety, performance, price, quality, and breadth of products and services.  Weatherford also faces competition from regional suppliers in some of the sectors in which it operates as these suppliers offer limited equipment and services that are specifically tailored to the relevant local market.  Some of the Company’s competitors have better financial and technical resources, which allows them to pursue more vigorous marketing and expansion activities.  This heavily competitive market has impacted the Company’s ability to maintain its market share and defend or maintain the pricing for its products and services.  Heavy competition has also impacted the Company’s ability to negotiate contract terms with its customers and suppliers, which has resulted in the Company accepting suboptimal terms.

The Company’s operations are also subject to extensive federal, international, state and local laws and regulations relating to environmental production, waste management and cleanup of hazardous materials, and other matters.  Compliance with the various requirements imposed by these laws and regulations has also resulted in increased capital expenditures as companies in these sectors have had to make significant investments to ensure compliance.

The decline in the price of oil and gas and the resulting adverse market conditions have severely impacted Weatherford affecting, among other things, the Company’s cash flow, borrowing capacity, and ability to service its outstanding indebtedness.  As with many of their peers, this drastic and prolonged drop in oil and gas prices has strained the Company’s liquidity for an extended period of time."

The June 28, 2019 8-K provides the following detail as to the impending default that triggered the immediate need to file for bankruptcy protection: "The Company’s 7.75% Senior Notes due 2021, 8.25% Senior Notes due 2023 and 6.80% Senior Notes due 2037 (together, the 'Defaulting Notes') provide for an aggregate $68.8 million interest payment that became due on June 15, 2019. The applicable indenture governing the Defaulting Notes provides a 30-day grace period that extends the latest date for making this interest payment to July 16, 2019, before an event of default will occur under the applicable indenture….If the Company does not make its interest payment by July 16, 2019 or has not filed the Cases, an event of default would occur under the applicable indenture governing the Defaulting Notes…An event of default under the Defaulting Notes may result in defaults and acceleration of maturities under the Company’s other debt instruments."

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